Pension liabilities are burdening state budgets to a larger degree than previously thought, according to a new metric that Fitch Ratings uses.
The rating agency now considers as part of its analysis a state’s unfunded actuarial accrued liabilities of the major pension systems for which the state is responsible, alongside its net tax-supported debt.
Subsequently, Fitch found that 14 of the 43 states it rates have a combined debt and pension allocation — or liability — greater than 10% of personal income.
What’s more, the median for the adjusted pension unfunded actuarial-accrued liabilities combined with the net tax-supported debt for Fitch-rated states equals almost 7% of personal income. That represents more than twice the roughly 3% median figure for net-tax supported debt alone.
The state of Illinois, for example, has a combined liability ranked second worst among states that Fitch rates, at 25%. Only Hawaii’s is worse. While Illinois’ reported pension unfunded actuarial accrued liabilities come in at $82.9 billion, its Fitch-adjusted unfunded actuarial accrued liabilities measure $101.5 billion.
State finance officials in Illinois said Wednesday they don’t typically comment on rating agency announcements like the metric change.
Gov. Pat Quinn, in his budget address last month, pressed lawmakers on the need to adopt pension reforms during their current legislative session.
Quinn said the state must “stabilize and strengthen our public pension systems once and for all.” A special panel is expected next month to announce proposals aimed at improving the overall health of the system.
There was a wide range in states’ pension burdens compared to net tax-supported debt burdens, the report noted. This boiled down to the fact that state use of net tax-supported debt is typically managed conservatively within various state constitutional or statutory strictures that limit issuance and monitor affordability. By comparison, states’ overall approaches to and responsibilities assumed for pensions vary significantly, according to the report.
The new metric should be of most interest to bondholders, said Laura Porter, a managing director at Fitch. “The most significant thing that we’re doing here is taking from cost-sharing plans only the portion of the unfunded liability that we’re estimating to be the responsibility of the state,” she said.
Fitch’s goal for the new metric was to develop a metric that would improve comparability among the states, said Douglas Offerman, a senior director Fitch. The use of a state’s unfunded actuarial accrued liabilities represents another part of the rating agency’s enhanced pension analysis, introduced last year
“The comparability of pension data from state to state has long been an issue in analysis of government,” he said. “The variations in planned features … the allowable differences in actuarial assumptions, make apples-to-apples comparisons really difficult.”
Fitch said that the new metrics, in and of themselves, would not likely cause any rating changes. It said the new metric should supplement existing state debt and pension metrics.